Eisman Is Gloomy on Canadian Housing

Jessica Rinaldi/ReutersSteven Eisman is the founder of Emrys Partners.

The hedge fund manager Steven Eisman rose to prominence in the financial crisis after betting against mortgages in the United States. On Wednesday, he turned his focus to Canada.

Mr. Eisman, whose wager against subprime mortgages was described in “The Big Short” by Michael Lewis, warned on Wednesday of weakness in the Canadian housing market and said lenders were vulnerable.

Speaking at the 18th Annual Sohn Investment Conference in Manhattan, Mr. Eisman, founder of Emrys Partners, said the rise in Canadian home prices in recent years was being fueled by the Canadian Mortgage and Housing Corporation, a mortgage finance entity that guarantees half of the country’s mortgages.

The corporation’s mortgage portfolio, Mr. Eisman said, is approaching a $600 billion cap recently imposed by the government, raising questions about whether it can continue supporting the market.

“When something gets that big, even governments get nervous,” he said.

What is more, he said, mortgage-underwriting standards are beginning to tighten. It’s a worrisome situation for banks, which hold “zero” capital against loans guaranteed by the mortgage finance giant, Mr. Eisman said.

“It’s like owning a sovereign bond,” he said. “We know where that got us.”

He focused in particular on the Home Capital Group, a mortgage originator specializing in “nonprime” loans. Mr. Eisman said half of the company’s $8.8 billion portfolio of these loans dated to the last two years, when prices were relatively high.

But Mr. Eisman was much more upbeat about the situation in the United States.

He singled out Ocwen Financial as a mortgage company that seemed undervalued, arguing that it would generate more than $1 billion of cash flow next year. The company’s stock, he said, represents a “powerful” and “counterintuitive” bet on housing.

Ocwen’s stock climbed as much as 3 percent after the remarks, and then gave up some gains to close up 1.6 percent, at $39.76 a share.

“Once in a while you come across a stock that is just completely and utterly mispriced, and that company is Ocwen,” he said.